The Bank of Canada (BoC) announced on January 29, 2025, a reduction in its key interest rate to 3.00%, a 0.25% decrease from the previous rate. This marks a cumulative decline of 2.0% from the peak of 5% reached in July 2023. Market projections anticipate further reductions of 0.25% to 0.75% throughout 2025, equating to one to three additional cuts of 0.25%. Consequently, the prime rate, which serves as a benchmark for mortgage rates, has adjusted to 5.2%. Additionally, the BoC plans to halt its quantitative tightening measures and will resume asset purchases in March. The looming threat of U.S. tariffs under President Trump's administration introduces significant uncertainty regarding future rate levels. The next BoC meeting is scheduled for March 12, 2025.

Recent economic indicators suggest a slowing of the Canadian economy's decline. Unemployment decreased to 6.7% in December from 6.8% in November, with the creation of 91,000 jobs—the most substantial increase in recent times. Inflation also saw a slight decrease, registering at 1.8% in December, down from 1.9% in November, and significantly lower than the peak of 8.1% in June 2022. These trends indicate a positive shift in Canada's economic trajectory. While one month of improved data doesn't confirm a sustained recovery, it is a promising development.
The BoC's decision to resume asset purchases and expand its balance sheet aligns with economic growth objectives. This shift from previous balance sheet reduction strategies is significant, particularly concerning fixed-rate mortgages. By purchasing government bonds, the BoC injects liquidity into the market, potentially lowering bond interest rates. Since fixed mortgage rates are correlated with bond rates, this action could lead to reduced mortgage rates and increase banks' capacity to lend. However, the potential imposition of U.S. tariffs adds a layer of complexity to these projections.
Potential Impact of U.S. Tariffs
President Donald Trump has announced plans to implement a 25% tariff on all goods and services from Canada and Mexico starting February 1, 2025. This move could exert various economic and inflationary pressures on the Canadian economy. Given President Trump's unpredictable nature, the final outcome may differ from the initial announcement. Complicating matters, Canada's political landscape is currently unstable, with the Prime Minister's resignation and a prorogued Parliament, leading to weakened leadership in addressing this challenge.
A 25% tariff would significantly increase the cost of Canadian exports to the U.S., likely reducing demand and adversely affecting Canada's export-driven sectors. This could result in job losses and slower GDP growth, potentially triggering a downward economic spiral as decreased employment leads to reduced consumer spending.
In response, the BoC might consider lowering interest rates to stimulate domestic consumption and business investment. However, reducing interest rates could devalue the Canadian dollar, especially if U.S. rates remain unchanged. A weaker Canadian dollar might offset some tariff impacts by making Canadian goods and services more attractive to American consumers. Conversely, imports from the U.S. would become more expensive, potentially driving up inflation. The BoC's mandate to maintain inflation between 1-3% could necessitate rate increases if inflation exceeds this range, even amid a recession.
If tariffs are less severe, ranging between 5% and 15% on specific products and services, the effects would be similar but less pronounced. Certain industries would be more affected than others, potentially leading to minor economic losses that could be mitigated by modest rate cuts.
Canadian retaliation could further complicate the BoC's decisions. Proposed tit-for-tat tariffs on American goods and services could be highly inflationary, given Canada's significant imports from the U.S. Such actions could disrupt supply chains, increase production costs, and lead to higher consumer prices, forcing the BoC to balance between controlling inflation and supporting economic activity.
In extreme scenarios, Canada might consider reducing oil, gas, and electricity exports to the U.S. Given that 74% of jobs in these sectors are supported by U.S. exports, such actions could lead to significant job losses and increased domestic energy costs, further fueling inflation.
Government intervention through support programs, similar to COVID-19 economic responses, might provide temporary relief but is unsustainable in the long term. The optimal solution would involve negotiations with President Trump to minimize tariffs. Additionally, Canada should focus on enhancing interprovincial trade by eliminating internal barriers and diversifying international trade partnerships to reduce dependence on a single, unpredictable trading partner. These strategies will require time and investment but could offset losses from reduced U.S. trade.
Mortgage Considerations
For individuals with variable-rate mortgages, the recent rate cut translates to a reduction of approximately $15 per $100,000 of mortgage. Those with variable rates and constant payments will now pay off their mortgages faster. Fixed-rate mortgage holders will see no immediate change.
If you're planning to purchase a property or renew your mortgage in the next six months, opting for a variable rate may be advantageous. Variable rates are expected to continue declining unless inflation rises without a corresponding economic downturn. This approach allows you to benefit from potential future rate decreases. Conversely, choosing a fixed rate now could lock you into a higher rate, preventing you from capitalizing on possible rate reductions. If inflation increases, switching from a variable to a fixed rate is typically straightforward and cost-free. However, if a variable rate causes you significant concern, a shorter-term fixed rate, such as a three-year term, may be a suitable compromise, minimizing potential penalties.
While the current situation may seem daunting, it's important to remember that Canada successfully navigated the challenges of the first Trump administration, and we are well-equipped to do so again. There's a possibility that President Trump's recent tariff threats are strategic posturing, which may not result in significant policy changes. Even if tariffs are implemented, they might be less severe than the proposed 25% on all imports. This scenario could serve as an opportunity for Canada to strengthen internal trade relationships and diversify our international partnerships. In the real estate sector, potential interest rate reductions could stimulate increased housing demand, reminiscent of the market surge in 2021. Therefore, unless your employment is heavily reliant on U.S. exports, it's reasonable to continue with your current plans, trusting that your dedicated mortgage advisor is closely monitoring the market on your behalf.
If you are not yet pre-approved, I suggest starting your process now and not waiting for more news about interest rate cuts, as the market will likely pick up and prices will probably rise. You would have the chance to explore a market with more inventory and less competition than if you wait.
If you need help with a mortgage, pre-approval, or a plan for the future, you can contact me or Gina by making an appointment:
Sincerely,
Simon Bilodeau and Gina Lopez
Mortgage Brokers
Refinancebc
604-828-9864
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